“You must gain control over your money or the lack of it will forever control you” – Dave Ramsey
President Buhari had signed the 2020 budget before the end of 2019, in a clear departure from previous experiences where the budget did not get to be passed until the middle of the year. To the relief of most Nigerians, we had finally got it right for once and it was something to be celebrated. Little did we know that coronavirus was on the way. As the pandemic hit the country and with the lockdown in March, the budget became untenable and unrealistic. The world economy literally shut down and went into a tailspin. People were stuck in their homes and physical movement was practically halted. Almost all nations of the world shut their borders. The direct impact of that was that no one was buying our oil until very recently. Prices crashed on the heels of demand that disappeared. Even though the world economy has begun to open gradually, oil prices are recovering at a very slow pace. As a result, our projections for the 2020 budget cannot hold anymore. We have had to pare down the budget to realistic levels. At least, that was the understanding among many informed Nigerians.
The initial national budget of N10.59 trillion was an increase of 2.5% from the 2019 budget of N8.92 trillion. The budget “for sustainable growth and job creation” set aside N453b, representing 4% of total expenditure, for social intervention. This was to be managed by the newly created Ministry of Humanitarian Affairs, Disaster Management and Social Development. This Ministry was given the mandate to focus on the avowed goal of lifting 100m Nigerians out of poverty in 10 years.
The budget estimate was based on some fundamental assumptions. Exchange rate was kept steady at N305 per dollar. GDP growth was estimated at 2.93%. Oil production benchmark was put at 2.18 mbpd.
Inflation was estimated at 10.81% for the year. Again, government projected a 7% rise in revenue from 2019 budget figures. This was going to be achieved partly with an increase in Value Added Tax (VAT), from 5% to 7.5%. To cushion the effect of this increase, government insulated the lower rungs of the SMEs from VAT registration. Companies whose annual turnover was below N25m were exempted from VAT registration. To tame food inflation, staples like bread, rice, yam, etc were VAT exempt. The jury is still out as to how the increase in VAT would benefit federal government revenue as 85% of VAT statutorily goes to the states
The total revenue expected to be realised as per the 2020 budget was N8.42t resulting in a deficit of N2.17t. However, as we shall see shortly, the deficit was understated as government has always failed to meet its revenue target in the last few years. Out of the revenue projection, 22% or N1.81t was going to come from non-oil sources while 31% or N2.6t was from oil sources. The remaining 47% or N3.97t was to come from other revenue sources. It is instructive to state that in the past four years, government has only been able to realise an average of 40% of revenue from the “Other Revenue Sources”. Extrapolating from this, it means that without the disruption in the economy by the pandemic, the maximum amount that would have been realised here would be about N1.6t, leaving a shortfall of N2.4t. Now, add that to the earlier recognised N2.17t deficit and you would end up with a total real deficit of N4.54t. This means that the deficit is about 54% of the revenue target. How to fund this large deficit remains to be seen more so now that Covid 19 has taken its toll on the economy. We shall return to this critical issue later.
A little digression, which is still very relevant though in this discourse, is that there exists a plan document that terminates this year. The Economic Recovery and Growth Plan was issued in 2017.
The document had some numbers we should have achieved during the period that it covered. A look into the ERGP shows that we missed virtually all the targets that we set for ourselves. By this year, GDP growth rate was forecast to be 7% as against the 2.93% we are now projecting. Inflation rate of 10.81 as against ERGP target of 9.9% is off target. Again, daily oil production capacity of 2.18 mbpd is a far cry from the ERGP target of 2.5 mbpd. This document runs out its lifespan this year with virtually all its targets unmet. It will be important to know what went wrong. It is either the numbers were not realistic or there was no commitment towards its implementation. Whatever be the case, it is important that as we draw up the next plan, we apply the lessons from the present one which was implemented in breach.
Realising the damage the Pandemic has wreaked on the economy, the government had sent a reviewed budget to the National Assembly. The objective was to cut down the budget by over N71.5b to a lower figure of N10.52t. Oil benchmark was also reduced from $57 to $25 per barrel while oil production was reduced from 2.18mbpd to 1.94mbpd. Revenue projection was reduced to N5.16t from N8.42t. This represents a drop of close to 40% or N3.26t. Given that the CBN had already adjusted the value of the Naira against the the dollar, the revised budget increased exchange rates from N305 to N360. Statutory transfers were reduced from N560.5b to N407.8b, a drop of N152.7b. Capital expenditure was reduced by N155b from N2.78t to N2.62t. Recurrent expenditure reduced by N25b from N4.49t to N4.46t. Fiscal deficit, therefore grew from N2.17t to N5.37t, which is expected to be financed through fresh borrowing.
It does appear that the government did not go back to the National Assembly for a reduction in the budget even though that was what was communicated. It must, however, be said that a N71b reduction in a budget of over N10t is like a drop in an ocean. The government truly realised that its estimates, in terms of oil receipts, were no longer tenable given the sharp drop in oil prices.
Consequently, the government proposed a conservative $25 per barrel but the National Assembly jerked it up to $28 per barrel. Even though the National Assembly felt that $28 per barrel was conservative enough, there are market realities that obey their own fundamentals and not the wishes of a price taker. The major issue that stood out was the realisation that the revenue target was unrealistic. Rather than recognising a deficit of N2.17t, it became necessary to get the National Assembly to approve the real deficit of N5.37t which will be funded by internal and external borrowing. Bear in mind that from the total anticipated revenue of N5.2t a provision of N2.95t had been earmarked for debt servicing for the year. That means that we are setting aside about 57% of our revenue this year to debt servicing.
Now, why do all these matter? In the first place, there is nothing to cheer about over either the original budget nor the so-called revised one. This is because just like we said last year, your average share in this budget does not leave you any better than where you were last year. Your share as an individual, is just $150 or N54,000.00, yes fifty- four thousand Naira for the year. It means that if the budget were to be shared equally to everyone you will go home with N4,500.00 per month. Compare that with our counterparts in South Africa and Angola who will go home with $2,200.00 and $1,200 each, per year!
The second point is about education and health. The Pandemic has revealed how “wicked” we have been to ourselves over the years. We have left the public health system to decay. The state of our healthcare system is so bad that other than a few cities like Lagos, Abuja and probably Port Harcourt, there is no where one can get standard (and we are not talking of sophisticated!) medical care in this country. Many people who ordinarily would have had no business dying have lost their lives in the last three months. These deaths may not be directly related to COVID-19 but technically, they are. Medical Personnel are stretched, local hospitals are ill equipped to attend to simple ailments and a few who would have sought help abroad are not able to do so given the lockdown. Even where there is available medical service, there is the poor COVID-19 testing environment that makes the medical personnel take extra precaution before treating even simple ailments.
With the epiphany brought about by the pandemic, one would have expected that we will use this period, to declare an emergency on public health. Curiously, and apparently to no one’s disappointment, neither the original budget nor the revised one paid attention to the gaping need for improved healthcare system in Nigeria. For instance, the projection for healthcare in the original budget was N441b, a meagre 4.2% of the budget. This is in contrast with the situation in South Africa and Rwanda, where they have complied with the World Health Organisation recommendation that countries should not spend less than 15% of their annual budget on healthcare. Nigeria, which is expected to lead the way in Africa, is shamelessly in breach. On education, we budgeted N686b or 6.5% of the total figure in the original budget. This is far below the UNESCO recommendation of between 15% and 20% of budget allocation for education in developing countries. It is disheartening that the percentage allocation to education in Nigeria has instead continued to drop on a yearly basis. Starting from 2015 when it was 12.3%, it dropped to 9.2% in 2016, 7.3% in 2017, and 6.5% this year.
The next point which one must say, has been over flogged is that of the persisting debt overhang. By the end of March 2020, our total debt stood at $79.3b. In order to fund the revised budget, we need not less than $15b, in additional loans. The big questions are: can we afford to service additional loan if we already set aside close to N3t to service the present outstanding balance? Who would lend us that money and at what price, both in financial and political terms? If we believe we are going to meet the shortfall by printing money, has anybody bothered to consider the inflationary implications?
The next point that is of concern to us is the structure of our budget and therefore our government. No matter what we do, we seem to be stuck with 70% of our budget going into recurrent expenditure. In the revised budget, 73.5% of total expenditure will go into salaries and debt servicing, while only 26.5% will go into capital expenditure. What does that mean for both physical and social infrastructure development? What can we do to reduce the cost of governance at both the executive and legislative arms of government? Again, if for any reason we are unable to fund the budget completely like has been the case in the last few years, it is Capital Expenditure that bears the brunt. The implication is that there are chances that the meagre allocation to infrastructure may not be implemented in full.
The final point is an ideological economic issue. There is no doubt that the economy will go into recession by the end of the third quarter of this year. Given this situation, one question that we need to ask ourselves is whether the government should be reducing or increasing the budget. It is important to hold a conversation around whether the National Assembly did the right thing by increasing the budget even if the reason for the increase had nothing to do with stimulating the economy. Talking about stimulating the economy, we need to interrogate the options of the level at which government should pitch its social spending. Should it be at the level of government agencies or should it deal with putting money in the hands of consumers to stimulate demand and therefore production? Should the government do something different to encourage consumption and local production thereby creating jobs and increasing GDP?
It is important to ensure that we do not waste the awareness and opportunities created by this pandemic crisis. We advocate here that Nigeria must declare a medical emergency immediately. We must invest heavily in healthcare, for the sake of everybody, whether rich or poor. We had made recommendations in the past on how we should tackle our public health challenge. We must start by shifting our budget emphasis to recognise this challenge. We also think that we should use the opportunity provided by this crisis to renegotiate our debts. In fact, we should be asking our creditors for outright cancellation and debt forgiveness. We are already in a debt crisis and from every indication, we cannot meet our debt obligations and still provide basic resources for our people. We cannot afford to devote close to 60% of our revenue to service debt. There is no better time than now to declare that we cannot pay. Closely related to that is that the time has come for us to reduce the size and change the structure of government to reflect our current realities. This column will be looking at this important issue in due course. We must begin now to prepare for the imminent recession. We must engage those who know amongst us to help us deal with this. Pretending that all is well is not a strategy. We must welcome anything that can push consumption and local production up at this time. We should discourage anything that puts money in a few hands as that will further weaken the economy. This may sound harsh, but we cannot afford to live in what is clearly a fool’s paradise.
•N/B: From July 2020, this column would be published every other Sunday.